It comes down to perspective, I think. Do we look at China’s actions through a western lens – or try to see them from the Chinese perspective?

In broad generalisations, western companies are obliged, by the demands of shareholders, to report at short intervals and therefore take a short-term focus. As China is a single-party state, with a market-socialist economy, it is not driven by the same intensity of focus on capital markets. It doesn’t think or behave in the same way. The danger of assessing China’s strategy from a western perspective is that we may review only the superficial manifestations, and miss the deeper transformation taking place.

In response, we may take familiar, tactical actions, and fail to address the real issue emerging over the horizon.

China’s economy (measured in GDP) has grown at a compound annual growth rate of 11.9 per cent over the thirty-year period from 1980 to 2010. That’s right through the dot-com boom and bust, through the economic recessions, stock market crashes, bull and bear markets and the Global Financial Crisis. The strength of China’s economy isn’t “hype”. It’s very real. During that same period, India enjoyed a GDP CAGR of 7.4 per cent and USA showed 5.7 per cent.

Moreover, the comparisons made between India and China in terms of market dominance are largely made by western observers. As those working in outsourcing in China will attest with frustration, one of the industry’s greatest challenges is to get the top companies, the 21 Model Cities and the 33 provinces and regions to coordinate their endeavours and compete as a nation. Their focus isn’t so much on India, as on each other, as rivals for foreign direct investment and central funding. It seems to be Indian companies, looking over their shoulders at a rapidly approaching China, who are more vocal in this comparison than their Chinese counterparts.

“According to China’s Ministry of Commerce, the total contract value of executed outsourcing contracts in 2010 with Chinese-based service providers was approximately $19.8 billion, a 43.1 per cent increase from the prior year.” … and that’s not all. At $171.2 billion China’s 2010 services outsourcing exports increased by 32 per cent over 2009 making China now the third-largest services exporting nation in the world. Given that China entered this space 20 years later than India, their acceleration to this position illustrates a very rapid growth curve.

Kevin Parikh asks: “So how can China rise to compete globally in IT Services?”. The answers he presents to that question reflect the approach that India might take to addressing the question. But China and India do not operate in the same way, they don’t think the same way, and they are not addressing services outsourcing in the same way at all.

Kevin suggests: “Focus on market share: not on ‘beating India'”

In China’s 10th Five-Year Plan, published in 2001, China’s approach was to learn about services outsourcing and understand how to develop a services economy.

In the 11th Five-Year Plan, published in 2006, China announced the 10:100:1000 plan: bring ten global outsourcers into China, fund 100 cities to restructure their economic foundations on the services economy, and encourage 1,000 SMEs to build their services to international standards (ISO CMM, CMMI). They overshot the mark.

In the 12th Five-Year Plan, released in March 2011, China made it patently clear that it was changing the focus of its strategy from external, to internal, in order to create the infrastructure needed for stronger growth in the years to come. They announced (now over a year ago) that they would allow GDP to slip from double digits to seven per cent if needed, to accommodate this refocus – which is, in itself, an unprecedented strategy.

We have seen the emphasis on China’s infrastructure growth in railways, shipping, hydro-electricity, inland waterways, airports and roads. In outsourcing, China’s approach for the remaining four years of the current plan will not be on its share of the international market. Instead, the Chinese government, which is the majority owner of all of China’s strategic assets, will be encouraging outsourcing from its state-owned corporations into China’s medium-sized outsourcing companies. The intention is to drive growth into those companies, using government contracts in banking, insurance, utilities, logistics, transportation – so that by 2016 those 1,000 companies it fostered back in 2006 will be fit to compete on the world stage for global contracts. China is indeed focussing on market share – but China does not take a short-term view on anything, and market share is no different. China is not actively driving market share growth in the current plan – instead it is building the services outsourcing infrastructure that will assure it of market prominence by 2020.

By way of example of China’s emphasis on building outsourced services capacity, Avasant’s table in the March article illustrated the infrastructure capacities of 18 cities. Actually, there are 21 Model Cities centrally funded to compete internationally in outsourced services – but they are just the thin end of the wedge. China’s top 131 companies (as assessed by Gartner on behalf of China’s Ministry of Commerce) have located their 710 branches in 94 cities across the length and breadth of China. Each of those 94 cities is competing to attract services.

The following table shows just the top 25 cities, and the number of top-131 companies they have attracted. These companies have ‘voted with their feet’ and decided this is where the best commercial opportunities lie for them.

Moreover, China has established no less than 1,609 high tech parks and economic development zones. Now, many of these are actually dedicated to the transformation of China’s manufacturing industry – but 356 high-tech parks are specifically focussed on services outsourcing.

257 of them offer KPO, with advanced R&D into pharmaceuticals, bio-technology and advanced telecommunications

126 high-tech parks support IT outsourcing

24 high-tech parks are focused on BPO

six high-tech parks specialise in outsourced industrial and commercial design

four high-tech parks are dedicated to outsourced services to education

Kevin notes that “the large potential for growth of the domestic market in China (including MNC subsidiaries in China) has only recently been unleashed. These unique markets should continue to be the focal point of entry for all Chinese service providers.” Well, they will do that – and the local market will require them to grow at a rate with which they are entirely unfamiliar. There will certainly be ‘growing pains’. But be careful what you wish for – because the result of this current internal focus will ultimately be an externally-oriented upscale services outsourcing infrastructure that will present exceptionally compelling value propositions towards the end of this decade, against which the rest of the world will have to compete.

Meanwhile, China’s hunger for resources that we have witnessed in the primary industries (iron ore, coal, grain) will now be felt in the services industry. To grow at the rate that China needs, these 1,000 companies will need foreign direct investment – but more than just money, they will need corporate strategic investors who bring broad domain expertise, vertical market expertise, applications knowledge, senior management capabilities and corporate leadership and governance skills. And it’s not that China doesn’t have these already – it’s simply that in the current period it will need more of them than ever before, and at a level of maturity that is more easily found in large western corporations.

“b) This is about building businesses, not global politics”

China is taking a higher view: this is about building nations (one nation in particular). It is about building companies insofar as they are the building blocks of the nation. It is not about global politics. In this strategy, China is not especially concerned with global politics – it’s about China’s own socio-political agenda – and India can like it or lump it.

“…the industry’s development has to be market-driven and not constrained by a political agenda.” Sorry Kevin, but that’s not the Chinese way of thinking. China isn’t a capitalist society and is not committed to driving its nation’s growth solely by market forces. The industry’s development doesn’t have to be driven by market forces at all. When the government owns all the nation’s strategic assets, it can determine how fast outsourcing grows, simply through government policy. And in China, the scale of outsourced contracts serving a population the size of the combined populations of India and the USA, the total domestic market size for outsourcing can be modified very quickly.

Oh, and China’s political agenda is not constraining its progress – it’s driving it – harder and faster than any other nation on earth. In 1980 China’s GDP was just 7.26 per cent of the USA. By 2011 it had reached 52.64 per cent of the USA (and over four times the size of India – in case you’re still making those comparisons). China is on track to surpass the USA as the largest economy in the world somewhere between 2020 and 2025.

“Remember, in 1980, China’s GDP was just 7.3 per cent the size of the US economy. When China will actually overtake the US economy in terms of absolute size is hotly debated. But what isn’t in debate is that on current projections, China’s economy is likely to be the largest in the world before the end of the third decade of this century.”
Rudd, K. (2011) ‘Australia-China 2.0: The next stage in our economic partnership’. Australian Minister for Foreign Affairs (former). Guangdong University of Foreign Studies. Guangdong, China. http://www.foreignminister.gov.au/speeches/2011/kr_sp_110522.html

“Increase education focus”

Yes, we acknowledge that NIIT has done an exceptional job in this space. India should be justifiably proud of its record in outsourcing education and training. But the comments that China’s education system is not sufficiently attuned to the needs of the outsourcing community should not be uniquely addressed at China. It is almost impossible – in North America, Oceania, Eastern and Western Europe, South America – to find outsourcing-specific undergraduate or post-graduate programmes. My blogs; http://outsourcingeducation.blogspot.com.au/ and http://outsourcingprofession.blogspot.com.au/ have been seeking academics globally who will help the industry to address this problem. However, China is actually doing a pretty good job of tackling the issue. Listen to KPMG’s China experts on this topic: ‘Can China’s education system support outsourcing?‘ You’ll hear how China is educating 1.2 million graduates in outsourcing as part of its national push into KPO.

“Slow down infrastructure build until cities can be filled. Empty buildings still have to be maintained.”

This observation really reflects the classic short-term perspective that, while economically sound and consistent with western market-oriented business practices, sits at counterpoint to China’s longer-term social reengineering agenda. It’s telling China how to do things in the western way.
China is closing down entire industries whose ecological footprint is unsustainable, whose technological bases are outdated – and it is relocating those industries into parts of China where the economic benefits can be shared across a broader section of society. As it does so, it is building new plants and civil infrastructure, based on advanced technologies, carbon neutrality and communities that are sustainable both ecologically and economically. This is a massive undertaking in social and industrial re-engineering that would probably not be feasible in a classic western democracy. The process requires new infrastructure to be built in advance, to minimise the disruption to production when the transformational change is effected. And the shareholders – whose share prices would be affected if the market sees underutilised assets and diminished return on investment – well, those shareholders are the government of China – so they don’t have to fear an adverse market reaction in the way that western companies would.

Avasant’s observation that some of China’s high-tech parks are not fully utilised reflects China’s view that it is building capacity to accommodate its very high growth expectations for the services outsourcing community – not just for this quarter, not even for this year, but for the rest of this decade. As for creating positive value for the Chinese economy: it would be prudent to consider the longer-term view.

“Focus on English plus focus on communications and cultural understanding”

“One of the challenges for Chinese providers to compete globally is to address the market’s concerns over the Chinese workforce’s capacity to deliver services in English.”

Well, at the risk of stating the obvious, English is critical only if your major markets are English speaking. China’s domestic market is as large as the USA and India combined – and you don’t need English to serve that market. That means a massive outsourced services delivery capability that does not need to be English-centric. China is also serving other Asian markets very successfully – so we should be careful not to superimpose our own market characteristics over markets where they don’t fit quite as neatly. Having said that, it is definitely China’s intention to serve English-speaking markets, now and even more so in the years ahead, and China is taking comprehensive steps to educate its workers in English, right across the board. In terms of building familiarity with western business practices and consumer experiences, that’s an area that is emerging as one of China’s ‘growing pains’. China’s companies need strategic partners who can help them to address this issue – and they are assertively seeking collaboration in that regard.

“Maintain strong government support”

By now, my views on this should be easy to spot. The government of China isn’t just supporting the outsourcing industry. It has determined that services outsourcing will be a major tranche of the Chinese economy in the fourth decade of this century, and it is driving massive changes to the national, social, political, industrial and commercial landscape to make that a reality. (Indeed, in terms of the relative competitiveness of nations, China has awoken to the reality that it is not primary industry – mining and agriculture – nor secondary industry – manufacturing – that will be the battleground for economic survival in the second half of this century. Global competitiveness will depend on relative strengths in the tertiary industry – services-oriented economic models. Few national governments have demonstrated such foresight and acted so comprehensively to provide long-term security for their citizens). While some western politicians fluctuate between condemning outsourcing and supporting international trade in services, fearful of losing government if they make electorally unpopular choices, China’s government has made outsourcing-related policy decisions and implemented those policies so assertively as to forever change the face of their nation.

From a purely tactical perspective, incentives for foreign direct investment in China’s outsourced services industry are possible at three distinct levels. They can be secured through central, provincial and municipal (city) governments and their agencies. This, in my view, is typical of the international investment promotion arms of governments in Europe, Central and South America and other parts of Asia. China’s incentives can have a particular Chinese flavour, such as the provision of housing, transportation, training and recruitment of employees, especially when located in non-central locations (where high tech parks are often situated). Beyond that, many of the high-tech parks and their participant communities are willing to overlay supporting benefits to make selection of their particular location especially attractive. The reason they are inconsistent from one to another is that in a highly regulated Chinese context this is one of the few ways that they can create a unique differential advantage. Suggesting they become more uniform, for the convenience of foreign companies, is simply suggesting they surrender their competitive advantages so buyers can select between them as commodities. Would any of us take that advice?

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